Winning Streak Holding for Macau Casino Stocks – for now

It seems that every other month we’re forced to note the rally in casino stocks – specifically, the uptick from those players whose performance is driven by the increasing popularity of gambling on the Chinese island of Macau.

It’s that time again.

Here are the facts for this bi-monthly installment: The Casino Gambling motif is up 6.4% in the past month; the S&P 500 is down 0.7% in that same timeframe.

For the year-to-date, the motif has risen 55.0%; the S&P 500 has gained 23.9%.

Looking deeper into the motif, however, we return again to its international segment – and particularly, the Holy Trinity of Las Vegas Sands, Wynn Resorts and Melco Crown Entertainment. To make their relevance exceedingly apparent: They make up half the motif’s weighing, they are major players in Macau, and their stocks are up 8.8%, 11.8%, and 8.2%, respectively, in the past month.

A research note by RBC Capital Markets noted last week that November total gambling revenue grew 21.1% in Macau, above RBC’s expectation of 20% growth.1

Ironically, the relative underperformance of Melco Crown shares over the past month could be due to the fact that it has been doing too well in Macau. Goldman Sachs downgraded the stock last week, saying that the company outperformed the market last quarter and therefore expected “less dramatic” positive earnings revision momentum this quarter.

Such was not the problem for Las Vegas Sands, which, according to RBC Capital Markets, grew its Macau market share by 100 basis points to 21.9%, and was the leader in the “mass market” category, mainly middle-class tourists from China and elsewhere.

But look out, Sands, here comes Wynn Macau, the unit of Wynn Resorts – at least according to two JPMorgan analysts who like Wynn as its top pick in the industry. According to analysts Kenneth Fong and Daisy Lu, Wynn has evidenced a new assertiveness toward picking up market share in the mass market with strategies such as moving low-yielding tables from the VIP area to the mass-market floor, increasing table limits during busy hours and in premium mass areas.2

As a result, the analysts said Wynn grew its market share to 8.3%. Going forward, the analysts predict that if the company can persist in its positive yield trends, it could EBITDA growth of 20%-25% in this year’s fourth quarter – that’s against Wall Street’s current expectations for Wynn to grow EBITDA by only 7% in 2014. With expectations so low, the stock is primed for more upside, the analysts said.3

One could hardly call overall expectations in Macau low at this point, but we’ll see in another two months if performance can continue to over-deliver or come up snake-eyes.

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